Housing Won’t Heal Until the Renters Come Back

The housing market won’t fully heal until two classes of renters—those who have delayed forming new households during the recession and those who lost their homes to foreclosure and need to repair their credit scores and rebuild their savings—make the transition to homeownership.

And that may take a while. The U.S. lost 1.2 million households from 2005 to 2008 even as the country’s population increased by 3.4 million, according to a study from the Mortgage Bankers Association, underscoring the huge inventory glut that looms over any housing and rental market recovery.

Rising foreclosures have led the national homeownership rate to slide to around 67%, down from its 2004 peak of 69%. But the study finds that the current recession also led to an even steeper decline in household formation for rental apartment markets.

That bodes ill for the housing market, says Gary Painter, a professor at the University of Southern California who authored the study, because when household formation restarts, it will disproportionately benefit the rental market at first. As more rental households are added, that could cause the homeownership rate to register a larger decline.

The study also suggests that households that have moved during the recession have been more likely to become renters than owners after moving. “When they’re moving, they’re renting. They’re not looking to buy. That’s an important dynamic,” says Michael Fratantoni, the MBA’s vice president of research and economics.

Household formation typically stalls during a recession as would-be renters double up or move in with family. The study tries to quantify that effect, and finds that, young adults are 4 percentage points less likely to form an independent household during a recession, and individuals are 10 percentage points less likely to leave their parental home if they are unemployed.

Normal rates of household formation, or around 1-1.5 million new households per year, should return by 2012 assuming that the job market recovers. But it could take even longer for the U.S. to bridge the gap left by the lost households during the past downturn.

“The clear implication is that there is no demographic silver bullet that will solve the supply overhang we are seeing in many housing markets across the country,” says the study.